Almost three decades ago, the cover of Business Week asked "Are Utilities Obsolete?" It was just one of many forecasts of oblivion for electric companies, particularly those that owned nuclear power plants.

At that time utilities were winding up the post-World War II building cycle that had increased the country's generating capacity more than 10-fold since 1950. Construction costs in the boom's latter years were vastly inflated by the surging costs of skilled labor and building materials, as well as capital to finance the effort.

Rather than pass the cost on to ratepayers, regulators in many states forced utilities to write off billions of dollars. The results included dividend cuts, bankruptcies and wholesale carnage for share prices.

By the early 1990s most utilities had repaired their balance sheets by slashing capital spending, and the sector’s stocks recovered. Large customers, however, rebelled against the higher rates that were passed through.

The result was destabilizing deregulation, followed by the bankruptcy of Enron and the crushing utility-sector bear market of 2001-02. The Dow Jones Utility Average lost nearly 60% of its value peak to trough.

Today's electric utility sector is of a far different character.

The regulatory compact that came apart so disastrously in the 1970s and 1980s has been reforged, with companies and officials cooperating to meet a host of environmental and reliability-related challenges.

And the industry is moving into a new building boom, though today's record-low interest rates, moderate labor costs and soft materials prices won't last forever.

Electric utilities that successfully invest in their networks and earn a fair return are headed for years of prosperity, with rising dividends and share prices.

Those that either don't invest or aren't able to recover what they spend are headed for a repeat of the ruinous '70s and '80s.

Second chance

Now more than ever, it's critical for electric companies to be in front of the curve. The post-World War II building boom focused heavily on power generation. Americans were moving to the suburbs in record numbers, and companies above all needed to ramp up output.

By contrast, the coming round of capital spending is to meet efficiency, reliability and environmental challenges.

America's demand for electricity is still projected to rise by a percentage point a year to the end of the current decade, which translates into a huge increase in capacity.

But building new generation sources presents much greater engineering, financial, regulatory and legal challenges than in past decades. Consumers and businesses need reliable electricity more than ever. But many are unwilling to pay for it, let alone locate needed facilities anywhere near them.

A 2007 Brattle Group study commissioned by the Edison Electric Institute concluded that the U.S. power industry would have to spend more than $1 trillion by 2020 to ensure reliable electricity.

The vast majority of this sum would be used for upgrades to the nation's transmission and distribution system, improving efficiency that could limit the need for new generating sources.

As for production, Brattle forecast the bulk of the costs would be to comply with anticipated environmental regulation. It also predicted upward pressure on labor and materials costs would continue and potentially accelerate as utility spending rose.

Much of that forecast has come to pass. Carbon regulation has yet to pass muster in the U.S., as it has in Europe and Australia. But environmental cost pressures are nonetheless on the rise.

One reason is the age of America's coal-power plants, which until recently produced half of the country's electricity. The median age for these coal stations is 46 years. And many companies are shutting older facilities because they're no longer cost-effective to run.

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